Monday, May 17, 2010

The parental home as unemployment insurance

It is well known that in Spain and especially Italy, people in their twenties and even thirties stay with their parents until they find a job, and they often wait for the "perfect" job. This looks like an unemployment insurance with infinite duration with substantial moral hazard, which has lead to sky high youth unemployment rates in Europe.

Greg Kaplan is documenting that something similar is happening in the United States. Using the NSLY, he finds that many of those who do not attend college return home during unemployment spells, much like college students return home over the Summer. This analysis is very nicely done with an estimated structural model that features a repeated game between children and altruistic parents. In particular, this allows to understand why the savings rate of young people is so low. As they have the option of returning to their parents, they see no need to build up any precautionary savings. This means also that programs like unemployment insurance have little impact for them.


Anonymous said...

Surely parents must save more, so as to be able to cater for their children that stay home. So, the savings rate argument is unconvincing.

save_the_rustbelt said...

Most young people do not devise a savings or no-savings plan based on some economic model of possible unemployment.

The savings rate is probably low because they do not much big piles of money.

Is anybody in touch with reality these days, or just buried in piles of statistics?

Kansan said...

So, would this mean that college age workers should not be covered by unemployment insurance?

Me XMan said...

Easy money and easy life creating laziness and dependency with children. Family culture must change to teach responsiblity and self-sufficient.